Edmond de Rothschild Asset Management: Riding the sustainability wave

Moving early to embrace green financing and the energy transition has been a conviction worth taking, says Edmond de Rothschild’s Jean-Francis Dusch.

This article is sponsored by Edmond de Rothschild Asset Management.

Infrastructure debt fundraising over the past year has once again demonstrated the resiliency of the asset class. Even against market shocks and global volatility, the top 30 debt firms increased capital raised by more than $23 billion since last year’s ranking list and LP appetite shows little sign of slowing.

As a prime case in point, Edmond de Rothschild closed its BRIDGE-V infrastructure debt funds vintage on €2.5 billion last year. Jean-Francis Dusch, CEO of Edmond de Rothschild UK and CIO of Edmond de Rothschild Global Asset Management Infrastructure Debt, sets out the many challenges and opportunities that are emerging in the infrastructure debt space, and why focusing on sustainability is the future. 

What was your experience of fundraising through the recent volatile period and how were you able to offset the challenges? 

Jean-Francis Dusch

When we originally came to market, we thought to ourselves that even if we just matched the €1.25 billion-€1.5 billion of our previous vehicles that would already be a success. The platform has grown fast, and today we exceed €5 billion, so that just shows our credibility and attractiveness.

The themes we cover also play a role in that. We were a first mover in the energy transition, SFDR and taxonomy as well as to give a concrete measure of our investments’ impact. That has been integrated in our investment process since 2017 and our portfolios are quite proprietary. 

A lot of that clearly resonated, as well as the performance of our previous vintages.

We did notice that towards the end of last year some investment decisions were becoming delayed. But we were less affected by that because we planned to close BRIDGE-V in October. I would say actually that played into our favour as it impacted the competition and we have just tapped the market with BRIDGE-VI. 

Why focus on a combination of social, transport infrastructure, energy transition and digital? What makes these subsectors particularly attractive?  

When we launched BRIDGE back in 2014, infrastructure debt was mostly transport and social PPPs. At the time, we decided that digital infrastructure, telecoms, energy storage and energy transition should become part of the play. This was before the energy transition became the fashion or underpinned the regulations we now live with. It as a conviction to have a broad approach to the sectors, and I believe in interconnectivity. 

If you look at emerging markets, it is fascinating how they develop because you cannot just build a power plant on its own. You also need the roads and communication. Everything interconnects.

It is the same when you think about the energy transition. From BRIDGE IV in 2018, we obtained an energy transition label, but we did not want to just build a pure renewables portfolio. The energy transition includes green mobility, social infrastructure with energy efficiencies and the decarbonisation of utilities. 

By being a first mover and arranger, you also create a bit of pricing advantage for investors whilst strengthening the credit. We began very early to look at the second generation of technologies like battery storage, hydrogen, hydroelectricity, green mobility or floating offshore wind among others. We also spoke with industrial sponsors and consultants to become comfortable with the construction and operational risk attached to those new subsectors. 

How do you go about differentiating yourself from the competition?  

Everybody now has a broad sectorial approach. But we had our convictions very early on. In digital infrastructure, we hired people eight years ago and when we developed the yield-plus strategy, totally separate from senior debt, it was challenged among peers because some thought maybe that was not the right direction to go.

In the same way, we introduced very early an ESG process into the sourcing, structuring, closing, monitoring and reporting of investments. We apply concrete measures of CO2 emissions avoided and alignment against the global warming reduction targets, which are audited independently.

We have hired people with industry background and track record of advising governments. When you invest in real and regulated assets, it gives you a certain advantage because they will be best placed to ask the right questions to borrowers and consultants.

This gives us the skills to source a proprietary opportunity at an early stage, mitigate risk and invest with a structure and pricing edge. We also have a large team that allow us to cover all sectors, multiple transactions and can take the time to source and craft them. Such a combination makes these investments possible.

How did the macroeconomic backdrop and threat of recession affect deployment last year?

The last three years have demonstrated that if you structure well and do not take a copy and paste approach to transactions and investments, portfolios will resist quite adverse conditions, even a pandemic. We are very humble and monitor everything rigorously aware that anything can happen.

We anticipated a lot of discussions with borrowers to assess the impact of adverse situations and reassure investors. Arranging the debt instruments we invest in gives us some control to protect investors over the life of our investments.

For example, when the Russia-Ukraine war struck, we analysed whether there was a decent supply of material with an appropriate protection mechanism against potential cost increases. We also undertook a thorough analysis of rising energy prices across our portfolio.

It was a record year for us. We deployed 30 assets aggregating €1.5 billion, almost twice what we achieved the year before. We also do not really depend on governments to launch projects. We are not going to wait for a programme to be implemented, albeit we will ensure we have early discussions to anticipate the next three to five years potential investments.

Interest rates rising is more of an opportunity for us; we capture the base rate and maintain the spread to ensure more yield for our investors and keep the asset class attractive versus other credit products.

What are the main opportunities you are targeting in your sixth infrastructure debt vintage? 

The energy transition is definitely accelerating across all sectors. The EU’s Fit for 55 pledge to reduce emissions by at least 55 percent by 2030 already has a material big impact in this. We made our first investment into green mobility four years ago but now there are many more opportunities, which our early moves enable us to capture sensibly for our investors.

Given the scale of transformation needed across society, infrastructure debt has an even greater role to play to increase the deployment of the required capital. Decarbonisation of utilities will also bring many opportunities, but we need to be selective about which to target. On the pure energy side, there is an acceleration in the implementation of new technologies.

There is also digital infrastructure with its strong social impact as ESG is also about social infrastructure with energy efficiencies which also offer good spreads. We are going to expand into the US too as the pipeline becomes very concrete and provides very attractive risk-return – our team has longstanding track record there.

With the IRA bill, the US is really making things happen and we have a good investment pipeline ahead. Similarly, we are going to add another junior strategy to our existing yield-plus offering to support further the development plans of developers and operators of the next generation infrastructure. 

How can infrastructure debt align with investors’ demands for greater sustainability and ESG criteria?  

As a firm we are very focused on ESG and that is what first drove the launch of our infrastructure business. We launched our first senior infrastructure debt fund with a Greenfin energy transition label in 2017.

We conceived that because we knew the SFDR was being developed and would have a big impact on the market and investors’ behaviours. We had already worked with some governments on taxonomy in our capacity as an adviser, so we were well placed to anticipate the trend and assess the challenges and opportunities.

I would say we have a very well-integrated process. From sourcing investments, to the way we structure, monitor and report them, we have developed concrete ESG measures such as CO2 emissions avoided and alignment with the global warming reduction targets. Our funds are documented to meet the Article 8 requirements.

It is not just at our discretion; it is something that is discussed with investors to often implement tailor-made reporting as information disclosure requirements are huge and complex. Our advanced and detailed process probably contributed towards our successful fundraising.

It is a question of conviction. It is one thing to just stick to the regulations and another thing to say ‘this is our investment strategy and belief and why we believe we can do it well on your behalf’. As asset managers, we want to contribute towards building sustainable infrastructure and to make the planet a better place for everyone. 

How do you see fundraising playing out this year and into next?   

I always say that good managers have to be a bit paranoid and always question themselves. It is probably the best way to stay on your toes and protect investors. When I look at the pipeline for fundraising, decisions are being made as we speak, and we are pretty optimistic.

In terms of demands from investors and discussions, it is a very busy period and infrastructure debt is probably one of the most sought-after asset classes. For us, it is about being clear to investors how our offerings can add value and making them understand our USP. Our track record is strong, with in excess of 100 investments and with no incident.